Standard Strategy

Every autoinvestor strategy is based upon a set of general portfolio preferences (e.g. number of stocks, cash reserve, etc.) along with a collection of trading rules. The standard strategy is the latest generation autoinvestor strategy. This strategy type has the following features (described in more detail in the sections which follow):

• Portfolio Composition - you can specify the number of stocks and cash reserve.
• Rebalancing - you specify how frequently your portfolio is rebalanced by comparing holdings with the strategy recommendations.
• Liquidity - you can limit your purchases and sales to more liquid stocks if you are trading a high value portfolio.
• Weighting of holdings - you can weight your holdings evenly (all stocks have same holding size), manually (e.g. the 'best' stock has a double position in your portfolio) or using a formula (e.g. weight by market cap).
• Rule sets - You use one or more rule sets to define the ideal stock holdings for your portfolio at any point in time.

It is important to take a moment to contrast the standard strategy with the classic strategy (with which many veteran users of the Stockworm site are familiar). The primary conceptual difference between the standard strategy and the classic strategy is that the standard strategy does not explicitly have any close rules; rather old positions are closed and new positions opened whenever the strategy rebalances the portfolio and finds that the current holdings do not match the list of stocks generated by the open rule set(s). An additional difference is that the standard strategy does not allow for short positions (this feature will be introduced in the future).

A sample strategy is shown below:

Creating a new strategy

New strategies can either be created by either modifying an existing strategy or by using the 'new strategy' quick link. The 'create new strategy' quick link will create a 10 stock strategy without any rules. You can then modify this strategy to suit your needs.

The sections which follow provide a description of all of the parameters which go into a strategy.

Portfolio composition

The portfolio composition options include:

• stock count - the desired number of stocks in your portfolio. The number of portfolio holdings will generally be equal to the stock count unless the autoinvestor cannot find stocks which pass all of the 'open' rules. If this is the case, then a cash position will be held until a suitable stock is found for the portfolio opening.
• cash reserve - the amount which you would like to keep as a baseline in the account (it will not be available for stock purchases). This amount can be specified either as a percentage of the portfolio value or as a flat dollar amount. A cash reserve of at least a few percent of your total portfolio value is highly recommended so that fluctuations in the price of a given stock after you have issued a buy order will not cause your portfolio to go into a negative balance.
• notes - notes allow you to provide a brief description of the strategy for later reference.

Rebalancing frequency

The rebalancing frequency is a key component of the standard strategy. Any portfolio which is managed by the strategy is rebalanced to assure compliance with the strategy on a frequency which you choose (e.g. daily, weekly, etc.). The longer rebalancing frequencies (monthly and greater) include options for trading at the beginning, middle, or end of the period. The first step in rebalancing a portfolio is to simply assure that your portfolio of, e.g. 15 stocks, holds the top 15 stock recommended by the strategy on a given date. If some items do not agree, then buy/sell recommendations will be issued to bring your portfolio in line with the strategy.

The other important rebalancing parameter is the 'rebalancing threshold'. If you already own the holdings which are recommended by the strategy but your portfolio holding size differs from the strategy-recommended holding size for a given stock by more than the rebalancing threshold, then a partial purchase or sale will be executed to properly balance your portfolio. Select 'always rebalance' if you want to always rebalance your portfolio, even if this means, e.g., adding a single share to your holdings. Select 'never rebalance' if you want to open or close full positions as required but never expand or contract a held position.

Liquidity

If you are dealing with a small portfolio (e.g. $10,000 or so), then you may choose not be concerned about how your stock purchases and sales affect the market price of the stock. If, however, you are dealing with larger portfolios (particularly $1 Million+), then it is essentially to establish that your strategy only be allowed to buy and sell stocks which could reasonably be purchased on the open market for a given position size.

To this extent, the standard strategy provides a 'liquidity' parameter which will be enforced when picking stocks using your strategy. The liquidity establishes the maximum percentage of the average trading volume (price * average daily share volume) which you are allowed to purchase of a given stock on a given day. If you find that your universe of stocks is too limited by a given liquidity percentage, then you can loosen the liquidity requirement a bit by allowing trades to take place over multiple days using the maximum open/close time parameter. If, for example, you allow a 5 day open/close time, then you can purchase 5 times less liquid stocks because a given position in your portfolio can be filled in up to 5 days. Note, that this multi-day purchase or sale option increases the number of trades which are executed and therefore will likely increase commission costs.

Weighting of holdings

The default setting for the standard strategy is to purchase even amounts of each of the stocks which are included in your portfolio. However, the performance of some strategies can be improved by purchasing uneven amounts of the stocks in your portfolio. The standard strategy allows for different weightings, using the stock weighting selection. The following weighting options are available:

• even - equal dollar amounts of each holding will be purchased
• fixed - allows you to provide 1 weighting factor for each stock. For example "2 2 1 1" will double the portfolio weighting (dollar amount) of the first two stocks in a four stock portfolio
• using parameter values - allows you to weight holdings in proportion to your selected parameter. For example, weighting by 'market cap' will weight higher market caps more heavily. You can provide a minimum and maximum percentage of the portfolio which each position will hold to avoid overly skewing the portfolio based upon a selected parameter.
• using custom parameter values - allows you to weight holdings in proportion to a custom expression which you specify. You can provide a minimum and maximum percentage of the portfolio which each position will hold to avoid overly skewing the portfolio based upon your custom expression.

Rule sets

The available trading rules for the standard strategy are all fully described in the rule sets chapter. If you choose to use multiple rule set, then the stocks generated by additional rule sets will be added to the end of the list from the first rule set. Multiple rule sets would be used when creating a complex strategy which is a blend of multiple disparite strategies.

Adding, deleting, and reordering trading rules

To add a new trading rule, change the 'add trade rule' combo box to the desired rule and the new rule will be automatically added. To delete a trading rule, simply click on the delete button to the right of the rule.

The order of trading rules is very important. For example if a minimum holding time rule comes before a stop loss rule, then the stop loss will not be honored until after the holding time. For this reason, up and down buttons are provided so that you can quickly shift rules up and down within your strategy.

Saving custom strategies

Once you have a strategy that you would like to simulate or use to manage a portfolio, you should save the strategy. If you are customizing your strategy from a new strategy, a Stockworm strategy, or a Community strategy then the only menu item which will be available is "save as" because you cannot overwrite default strategies. Other strategies will offer you the "save", "save as", "rename", "delete", and "share" options so that you can modify or share previously saved strategies.

After you have saved a strategy, it will appear in the 'my strategies' section of the strategy list page.